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Entering the Dragonīs Den |
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 Thanks to BBC television’s latest reality show, Dragons’ Den,
the general public has seen behind the scenes of one of the commercial
world’s most difficult tasks
– finding new capital. Sadly, most new
business ideas are never turned into reality because they fail to find
financial backing.
Often, this is not because the proposition is weak; it is because the
entrepreneur has failed to communicate the investment argument in an
effective way.Raising capital can be difficult even for those with a
decent track
record. For new entrepreneurs, the task can be nearly impossible. In
the fictional Dragons’ Den, the vast majority of contestants are turned
down by the panel of successful business people.
This is no great surprise because many entrepreneurs are badly prepared
when they go before potential backers. They simply haven’t worked out
their story. An outside investor will want to see and understand the
facts and figures on costs, the market place and competition before he
or she considers getting involved, so the entrepreneur needs to have
those ready. Poor preparation isn’t confined to the one-man-band
businesses. It happens even with substantial companies looking for investment
support from major financial institutions in London or elsewhere in
Europe.
The one essential tool for fund raising is a comprehensive business
plan. It needs to include a focussed summary of the business itself,
supported by financial projections, an outline of the marketing
strategy and a thorough evaluation of the market. The figures must be
more than just a profit forecast. They need to include a cash flow projection and a prediction of how the
company’s balance sheet will look at the end of the forecast period.
The business plan must also be brief, or it will be discarded long
before the investor reaches the end. It must have an executive summary
at the beginning, setting out all the key facts.
severe sepsis
One element often missing from badly prepared business plans is a clear
summary of the major assumptions on which they have been based.
Explaining the underlying thinking makes the plan seem much more
professional. Investors may not agree, but at least they will
understand the background to the venture.
Another common fault is not including any sort of sensitivity analysis.
The only certainty about business forecasts is that they are wrong, the
only questions are by how much, in which direction and, crucially, why.
Business plans need to recognise this and identify what the impact will
be if, for example, the business misses its sales target by five per
cent in the first year.
Once drafted, the plan must be shown to an outsider, preferably an
accountant or other experienced business consultant, who can ask all
those difficult “but what if” questions. The entrepreneur must be
prepared to set aside his ego and listen to what they say, no matter
how painful this is.
If changes to the plan are necessary, then pride must take second place
after good advice. Accepting outside input is essential for success in
business. Few lenders or investors will simply hand over money to
entrepreneurs and wait patiently for the return on their investment.
The most active investors, like business angels or venture capital
companies, will be actively looking to provide their own skills and
experience for the mutual benefit of all concerned. It might seem
obvious, but the larger the sums on the table, the more the investor
will demand to keep an active eye on it, including sometimes taking a
seat on the management board.
When everyone is happy with the business plan, it needs to be turned
into a professional presentation, which should communicate memorably
what the business does. If the core purpose cannot be explained in 30 seconds, the pitch is too
complicated and investors will lose interest before the client has a
chance to get into the supporting facts and figures.
The old cliché about identifying a “unique selling proposition” still
applies even if it may have been overtaken by newer management jargon.
It is essential to practice the presentation several times before
seeing investors. I have seen the credibility of some seriously good
projects destroyed by a hesitant delivery and worst of all when the
technology gets the better of the entrepreneur. Most presentations these days are done in PowerPoint, but there should
always be hard copy sets of the slides available in case the projector
bulb blows or the PC crashes.
The questions the investors might ask should be anticipated and strong
well-researched responses prepared. Once in front of the potential
investor, the approach needs to be open and not defensive. There will be detailed questioning and the entrepreneur and his team
must be able to demonstrate why their skills and experience will
justify the risk the investor is being asked to take.
One regular mistake is not raising enough money. If an idea is sound, a
professional investor will be happy to put in a little more, if it
gives the business a contingency fund to deal with the unexpected costs
and problems that are inevitable with all new ventures. Going back later to ask for more is usually difficult unless there is a
very good reason why the extra requirement wasn’t anticipated at the
outset.
Entrepreneurs must also be realistic and get guidance about the
potential value of the business. They need to be willing to give up a
significant share of the action. Investors will want a meaningful stake
in the company.
They will also want a good return on their investment and a planned
exit route so that they can see how they are going to get it back.
Raising money for new ventures is difficult at the best of times, but
good consultancy advice and a professional approach can prevent it
becoming mission impossible.
 Nick Hood is the senior London partner at Begbies Traynor, the UK’s leading independent business rescue firm.
www.begbies-traynor.com
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